I understand that it means betting against a company’s future prosperity in value.
But why is that a thing?
How does it actually work?
Who are you buying from/selling to, when you practice this?
Sounds more similar to gambling than to constructive investment.
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In: 9
It doesn’t literally mean betting against as in gambling. You don’t do this on a betting platform, but through a broker one.
In ELI5 terms, you borrow someone’s stock and promise to give it back at a certain date in the future. You borrow it to sell it for what is worth now, hoping that it will be worth less in the future when you buy another to give it back. Not always this will be the case, the price might also increase, meaning you will pay more than you got for it, thus being at a loss.
Yes, it feels like you are betting against the company, but it can also be that you feel it is overpriced right now. It doesn’t mean it will perform worse in the future, but maybe its price will converge to its real value.
Why would someone lend their stocks for this purpose? Well, shorting it isn’t free. You pay a premium and it is usually done in batches. Like you need to short 100 units and you pay 2 usd for each.
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